Beware the shortcomings of data on home prices and mortgage rates

Average home price data often have little meaning for what's happening in your neighborhood

To be useful, home price data must reflect what went down last week, last month, not years ago

Take mortgage rate data with the proverbial grain of salt

It has been said that figures lie and liars figure. But even when the numbers are truthful, they often are nearly meaningless.

Take average home prices. They are widely reported by regional and local media, even though they are generally national in nature. Although it's nice to know that housing values throughout the country are up or down — or holding steady — the figures often have little meaning when it comes to what's happening on your block or in your neighborhood.

David Rathgeber, a northern Virginia real estate broker, says home price data are "recreational" rather than actionable. He also rightly points out that the figures quoted are usually old news, as much as four months after the fact, even though they are often mistakenly reported as this month's or last month's numbers.

Why such a delay? A two-month delay is "unavoidable," he says, "due to data collection limitation — the lag between contract and closing — and another month or two for data assembly, review, comment and publication."

Rathgeber also points out that "taking action" based on information that is two to four months old "can be a disaster."

Prices rise or fall in two ways — appreciation or depreciation — and according to the mix of sold houses.

Isn't a lot of data skewed by the fact that so many properties are 'pocket listings' and never go on the mls or websites like zillow. I read about 30% of homes in my local area never even hit the market but are just shared between brokers.

If the trend has resulted from rising prices, sellers might want to hold firm on their asking price, even if the house is currently overpriced. It may be getting only a few showings, or perhaps none at all. But if prices are, indeed, rising, the seller can hold on until values catch up.

And if prices are falling, sellers will have to cut their inflated asking price by a rate greater than that of the overall market decline if they want to attract a buyer.

Buyers, on the other hand, may be willing to pay something above the asking price when home values are rising because they have a reasonable expectation that, in a few months, they will recoup their "loss." If prices are falling, buyers will have no sense of urgency because they expect greater value for their money in the future.

But beware: The average home price can change even when individual values do not.

That's because of the distribution of the properties covered in the price report. If more lower-cost houses than usual are sold in one particular month, the average price will skew lower. Similarly, if more than the usual number of expensive places change hands, the average will swerve higher.

And one more thing: The true average rarely changes more than 1% from one month to the next. So view reports that show values rising or falling more than that with skepticism. In Rathgeber's words, they are "patently meaningless."

Again, what's happening on a national scale usually has little significance to values in your neck of the woods. But even more important to note is that even though averages can be built for any ZIP Code and any month, the sample size is generally not large enough over a short-enough time to have any significance.

Generally, to calculate a meaningful average price for a particular area would require years of data, much of which would be so old that it would no longer be relevant. The actionable information today's buyers and sellers need must be fresh: what went down last week and last month, not years ago.

Although we are debunking myths about prices, let's take a deeper dive into two popular reports covering mortgage rates: one from Freddie Mac, the other from HSH Associates.

Freddie Mac, the huge secondary mortgage market company, publishes a widely quoted monthly report on the average rates for 30-year and 15-year loans. Its survey is an average of the offerings to "prime" borrowers from 125 primary lenders nationwide, large and small, for purchase loans with 20% down.

Even that much information is often more than gets picked up by news organizations. But how many people these days make that large a down payment? And who is a prime borrower? Freddie Mac doesn't have a definition, but reports that it is "not necessarily" someone who has never missed a payment and is always on time.

HSH, the New Jersey mortgage information firm, says its weekly average results from a survey of 600 "active" lenders who are in the market and able to make loans directly to consumers. Here, the survey asks lenders about their pricing for 80% loan-to-value mortgages to someone with a 740 FICO score or better.

This is the "stuff of normal humans," according to the company's Keith Gumbinger. But again, do you fit that bill? If not, you can expect to pay more than what's reported in the media. At the same time, because Freddie Mac's and HSH's numbers are averages, you might be able to find lower rates.

This is not to damn either Freddie's or HSH's surveys — or any of the pricing surveys, for that matter. Rather, the point is this: Take all that's reported with the proverbial grain of salt. Do your own sleuthing and you just might do better.

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